What is IR35?
IR35, also known as the Intermediaries Legislation, is designed to prevent tax avoidance by so called “disguised employees” working through intermediaries, like your Limited company.
If you’re “caught by” or “inside” IR35, you’re deemed to be employed for tax purposes, and the legislation ensures that you pay roughly the same tax and NI as an employee would, which can have a significant impact on your net income.
What changed in 2021?
Until April 2021, contractors working for private-sector organisations, were responsible for determining their own IR35 status. Whatever your "employment status for tax" was, your end client would pay your limited company’s invoices gross, and they would have no involvement in your tax affairs. It was then up to you to account correctly for tax and NI, and you were liable if you got it wrong.
This is no longer the case unless your end client is based entirely off shore, or is classed as a small private company. Instead:
Medium and large private-sector companies are responsible for determining the IR35 status of any contractors they engage.
Where the client determines that you're inside IR35, the “fee payer” (whoever pays your limited company) will have to deduct PAYE tax and NICs.
The 5% of turnover allowance is no longer allowed
There is no change to the criteria for IR35 determinations - the only difference is that your client is now responsible for assessing your status.
The main concern for a contractor is that you’ll be assessed as being inside IR35 when you’re not, but there are some things you can do to make that less likely.
How you can protect yourself
Make sure you understand your IR35 status
Before you can prevent your client from getting your status wrong, you need to know what your correct status is. Assessing IR35 can be complex, and we strongly recommend getting a professional review from an IR35 specialist.
A specialist will give you a detailed report, so you understand why they’ve come to their conclusions. They should also be able to advise you in ways you can strengthen, or possibly even change your position.
Once you understand your position it will be a lot easier to have the necessary discussions with your client.
If you’re clearly inside IR35
If your client finds that you're inside IR35, there is sometimes room to change this, depending on the reasons for their assessment. However, if you're clearly inside and it can't be changed you have to act on that decision. Working as if you're outside IR35 when you're not is risky for you and your client, and would not be advisable even if the client allowed it.
Exactly where you go from there will depend on your particular circumstances, and we'd advise you to discuss your situation in detail with a specialist contractor accountant.
If all of your contracts are likely to be inside, umbrella employment may be the best option for you. Again, we’d advise you to discuss your position with your accountant before making any decisions.
If you’re outside IR35
If your assessment confirms that you’re outside IR35, that doesn’t mean your work is done. It’s important to gather evidence to support your status at every opportunity.
Talk to your client
If you know you should be outside IR35, the best strategy is to help your client to make the right decision.
An independent assessment and evidence of your working practices could go a long way to helping your client understand your status, and make it less likely they’ll incorrectly assess you as inside IR35. Remember, it’s very much in your client's interests to assess your status correctly, so open lines of communication are key.
Most end clients are not experts in the contractor market, and you may find that your client is unsure of the detail surrounding IR35 or unclear about their responsibilities. If this is the case, it’s in everyone’s interest that they contact IR35 compliance experts like Orange Genie Compliance as soon as possible.